CME Group expands grain-trading hours to answer ICE

Are grain pit traders getting squeezed out?

Cornfield, corn Cornfield, corn

May 20 (Bloomberg) -- CME Group Inc., the world’s largest futures exchange, extends grain-trading hours today in response to the threat of competitors seeking a share of the electronic transactions that now dominate the market.

Access to the CME’s Chicago Board of Trade, which first offered corn futures in 1877, is rising to 21 hours a day from 17, a week after the 12-year-old IntercontinentalExchange Inc., or ICE, introduced a 22-hour session and its first-ever grain contracts. The Kansas City Board of Trade and Minneapolis Grain Exchange also start expanded hours today.

While CBOT corn, wheat and soybean trading rose more than 15 percent to 182.8 million contracts last year, 93 percent of the volume was electronic rather than through open outcry in its Chicago trading pits, exchange data show. That compares with 63 percent in 2007. ICE had sought to lure speculators by allowing transactions to continue when market-moving U.S. government crop reports are issued and CBOT markets were closed.

“The electronic platform is a big, giant liquidity pool that is sometimes an inch deep and other times a mile deep,” said Douglas Carper, the principal of Omaha, Nebraska-based DEC Capital Inc., a commodity trading adviser and hedge-fund consultant. “Grains will become more or less an institutional and professional market, just like it is already in stocks, foreign exchange and global bond markets.”

The Commodity Futures Trading Commission said May 18 CME could open markets from 5 p.m. to 2 p.m. Sunday to Friday, the first expansion of its Globex electronic exchange since January 2008. Hours for the CBOT pits in Chicago, where traders shout orders at each other and use hand signals, are unchanged at 9:30 a.m. to 1:15 p.m. Monday to Friday.

ICE Competes

CME, led by Chairman Terrence Duffy and Chief Executive Officer Phupinder S. Gill, initially sought expanded trading after Atlanta-based ICE announced plans April 12 to compete directly with the Chicago grain markets. Trading in ICE’s corn futures was 595 contracts on May 17, compared with the CBOT’s 232,706 futures contracts, exchange data show.

More access to the CBOT, where holdings in the five biggest grain contracts were valued at $131 billion in March, will be appealing to big institutional investors who prefer the ease and liquidity of electronic markets, said Jeff Hainline of Advance Trading Inc. in Bloomington, Illinois. It may create more stress for independent pit traders, farmers and grain elevators who use CBOT markets to hedge price risks, he said.

Opportunity and Threat

“It’s an opportunity and a threat,” said Hainline, the president of the risk-management company for grain processors and farmers who’s been in the commercial grain business for 35 years. “People who survive will adapt. You have to be a cockroach and not a dinosaur.”

Trading now will be open during the release of most of the USDA’s supply and demand reports, which will increase volatility and decrease the ability of traders to make informed decisions, said DEC Capital’s Carper.

“I see only increased risk,” Carper said. “A lot of trading will be based on reactions rather than orderly decision making. It will cause too many people to make decisions in a millisecond without any thinking. That can only cause a lot of trouble from a risk management perspective.”

The price of corn, the biggest U.S. crop and the most- actively traded agricultural product, rose or fell by the maximum allowed on the CBOT 12 times in the past year, exchange data compiled by Bloomberg show. Eight of those occurred after government reports that were issued while trading on the exchange was halted, between 7:15 a.m. and 9:30 a.m. in Chicago, or from 1:15 p.m. to 6 p.m.

Reviewing Reports

The USDA’s National Agricultural Statistics Service and Agricultural Statistics Board are discussing the implications of extended trading, Hubert Hamer, the chairman of the Agricultural Statistics Board, said in an e-mail. Any change to the report release schedule “is complex, has far-reaching impacts, and would be made very deliberatively,” he said.

Longer hours probably will accelerate the shift to electronic trading as institutional buyers and sellers avoid small hedgers, retail traders and advisers, according to DEC Capital’s Carper.

Electronic trading of CBOT corn, soybean, soybean meal, soybean oil and wheat futures was 169.45 million contracts last year, more than double the 82.21 million that changed hands in 2007, exchange data show. During the same period, pit trading tumbled 73 percent to 13.3 million contracts.

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